Yes, the game-changing device still accounts for about 7 percent of quarterly revenues. But Apple’s money could be better spent elsewhere. Here’s why and where.

According to several leaked parts and info coming from Apple’s Eastern supply chain, the company is not refreshing the iPod Touch much on Oct. 4, if at all. Apart from perhaps an uprated A5 CPU, grabbed from the updated iPhone, and apart from a lick of white paint, the flagship of the iPod lineup is not even being redesigned. It’s a minimal-effort update, because Apple’s attention is better spent elsewhere right now. In fact, it’s time for the entire iPod line to go, while it can leave on a high note, being regarded as one of the most transformational consumer devices ever made.

Apple sells four varieties of iPod today: The diminutive, screenless Shuffle for $49, the Nano for about $149, the touch from $229, and the Classic from $249. And Apple should kill ’em all. Here’s why.

The Classic dinosaur still sports Apple’s trademarked “clickwheel,” and it hasn’t changed much in engineering or UI design for years; it’s only added storage space as the tech behind hard disks improves (now coming with a 160 GB hard drive, but at the cost of a quarter of the price of an entire MacBook Air or half an iPad). We predicted its death a while back, but Apple kept it on sale–presumably appealing to a niche hardcore music fan who prefers to take their entire music collection (40,000 songs) or 200 hours of video on the road with them. But Apple’s moving away from magnetic drive storage altogether, and killing the Classic would be an easy decision for them, even if it’s true the costs of making the thing must’ve been shaved down to razor thinness over its years of optimized production. We’re guessing Apple will drop the hammer on the Classic next month.

The Shuffle packs just 2 GB of flash RAM. It’s small, quirky, cheap, and appeals to the entry level (and perhaps youth) markets. Apple introduced it to energize the iPod line and sell to a more mass audience, and when it arrived in January 2005 it was the first iPod to use flash memory. It competes in a very crowded space with branded and rebranded products from a huge number of peers, and for its price it’s possible to get a comparable MP3 player that has a screen–albeit without the Apple cachet. Apple likely doesn’t make huge profits on the device, although its manufacturing costs and BOM must be pretty small–it’s instead relying on profit by mass sales. Apple could easily exit this market and aim for yet more profitable segments.

The Nano has been through several innovations, and with its tiny touchscreen and iOS look-alike interface, it completely shook up the mid-price MP3 market when it arrived in 2010. We’ve seen that Apple has experimented with augmenting the Nano’s capabilities–incuding with a camera, which may arrive in its 2011 refresh, but we’ll talk more about the Nano later, as this could be the one iPod Apple shouldn’t kill.

The Touch is the big Apple surprise–it’s sales have been stellar since it launched, possibly because it offered the hugely desirable app experience offered by the iPhone at a lower price (and sacrificing phone and roaming 3G Net capabiltiies). According to some analysis, it’s responsible for one third of sales of iOS devices to date (60 million sales, roughly, to mid-2011), matching the flagships iPad and iPhone. Apple’s gently upgraded its capabilities and design as the years have passed, adding new features but always being careful to keep them lagging the iPhone so no cannibalization happens–apart from storage, which the touch beats the iPhone for.

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But Apple should kill the Touch after this latest minimal refresh, mainly because it’s likely releasing the iPhone 4S–the cheaper iPhone “lite”–to appeal to a more entry-level smartphone market, including those in developing nations, as well as the enormous global pre-pay scene. This phone is expected to beat the iPod Touch, if only because it sports a 3G connection and probably a better camera system. It’ll likely be comparably cheap, and in an era when everything is getting connected to the Net, and more emphasis is moving toward streaming content (as in Apple’s iCloud) it’s an example of how Apple will take its iPod line into the future … as iPhones. Maybe users will exercise the option to turn off the phone functionality and go for a data-only price plan, just as iPad 3G owners do now. It’s the natural successor to the iPod touch, especially next year when the iPhone 6 arrives, and the tech world will likely be flush with iPad-like tablets of all sizes.

Then there’s this graph, which tells you almost everything you need to know about iPod sales:

In the last quarter of 2010, the iPod was responsible for just over 8% of Apple’s total revenues, and then in the second quarter of 2011 Apple sold just 9 million iPods of all types compared to 18.7 million iPhones and 4.7 million iPads. This represented a 17% decline on the previous year’s figures. By this time next year, and probably after an accelerated drop in sales as the world gets more used to iPads and cheaper iPhones (let’s guess a 20% year-on-year decline which’ll see just 7 million iPods sold in the second quarter of 2012), Apple’s time and effort is just not going to be worth injecting into the iPod product line. That development cash (admittedly something Apple’s not short of) and staff could be redeployed to make Apple more innovative elsewhere.

Of course, we’re not suggesting Apple should merely throw away 6-8% of its quarterly revenues. It should transform its iPod into something new. Here’s what Apple could make: It could learn its lessons from the iPhone and iPad and apply them to the Nano, refreshing it dramatically by injecting a small but powerful ARM chip and low-power Bluetooth 4 tech, along with the smallest VGA webcam unit Apple can find. This would turn it, as we’ve suggested, into a second-screen iPhone companion (and, yes, discrete MP3 player) that could access a whole new lucrative app marketplace. Think: specialized apps for sports fans, check-ins, wireless payment tech, and so on. It would innovate into a whole new market, pulling off a trademark Apple maneuver.

The iPod changed the consumer electronics world, and arguably the entire music industry, but its time is done.

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